Capital Account Liberalization and International Corporate Bond Issuance: Transaction‐level Evidence from China

• Published date: 01 November 2023
• Author: Xiao Wang,Yongwen Luo,Ziyan Zhu
• Date: 01 November 2023
• DOI: http://doi.org/10.1111/cwe.12512

©2023 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 156–178, Vol. 31, No. 6, 2023

156

Capital Account Liberalization and International

Corporate Bond Issuance: Transaction-level

Evidence from China

Xiao Wang, Yongwen Luo, Ziyan Zhu*

Abstract

This paper provides transaction-level evidence about the impact of capital account

liberalization on fi rms’ bond issuance in the international fi nancial market. Using bond

issuance data for fi rms headquartered in China between 2014 and 2018, we showed that

domestic private fi rms issued more bonds abroad than foreign-invested enterprises after

restrictions were largely relaxed, controlling for possible confounding shocks such as

monetary policy, local credit market shocks, US interest rate, carry trade, and global

uncertainty shocks measured by the Chicago Board Option Exchange’s Volatility Index.

We found that domestic fi rms did not increase the overall volume of bond issuance but

just had a higher portion of international bond issuance. We also found that domestic

fi rms with higher tangible asset ratios tended to issue more bonds abroad. Our results

suggest that targeted liberalization policy could eff ectively stimulate fi rms to issue bonds

abroad. Policymakers need to monitor closely fi rms that issue more bonds abroad and

thus have greater exposure to global shocks, incorporate these fi nancial risks into policy

design, and safeguard fi nancial stability more eff ectively.

Keywords: asset tangibility, capital account liberalization, fi nancial shocks, international

bond issuance, transaction level

JEL codes: F34, F61, G15, G32

I. Introduction

Capital account liberalization is one of the important steps necessary to enable

emerging economies to be involved in the international fi nancial market. A large body

*Xiao Wang, Professor, International Institute of Finance, School of Management, University of Science and

Technology of China, China. Email: iriswx@ustc.edu.cn; Yongwen Luo, PhD Candidate, International Institute

of Finance, School of Management, University of Science and Technology of China, China. Email: cl1998@

mail.ustc.edu.cn; Ziyan Zhu (corresponding author), Master Student, Department of Economics, Graduate

School of Arts and Sciences, Columbia University, US. Email: zz3015@columbia.edu. Xiao Wang acknowledges

fi nancial support from the National Natural Science Foundation of China (No. 72003181). The authors thank

Guangtao Xia and the audience at the Conference on International Cooperation in a Changing Global Economy.

©2023 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Capital Account Liberalization and International Corporate Bond Issuance157

of literature has discussed the effects of liberalization on cross-border capital flow at

the aggregate level (Ghosh et al., 2014; Forbes et al., 2015; Korinek, 2018; Peng and

Yu, 2019) but gives less attention to the issue of how to estimate the direct impact on

fi rms’ international fundraising. Henry (2007) reported that there was mixed evidence

regarding the macroeconomic impact of capital account liberalization but indicated that

micro-level investigation could help to validate the role of opening capital accounts for

country development.

In this paper, we employ micro-level data in China from the period between 2014

and 2018 to estimate the impact of international bond issuance liberalization on fi rms.

Specifically, we ask a primary research question: How can we identify the impact of

cross-border bond issuance liberalization on fi rms’ international debt raising? Answering

this question helps to reveal how a specific capital account liberalization policy that

targets fi rms’ international bond issuance deregulation may aff ect fi rms’ direct fi nancing

from the international fi nancial market. Henry (2007) indicated that micro-level time-

series investigation on diff erentiated reactions toward liberalization between diff erent

groups of firms in a country can help to identify the causal effect of policy changes,

in comparison with country-level cross-sectional regressions on the impact of capital

account liberalization, because the micro-level evidence has more statistical power with

more observations, and the endogeneity problem is less of a concern at the fi rm level.

China’s economic environment and its swift policy changes on firms’ access

to the international capital market provide an ideal setting to identify the impact of

liberalization. After China’s accession to the World Trade Organization in 2001, the

Chinese government initiated several preferential policies to attract direct foreign

investment. Foreign-invested enterprises (FIEs) thus grew fast in China, synchronizing

the expeditious development of domestic fi rms.

Even though domestic fi rms and FIEs both grow rapidly, they have diff erent access

to the international capital market. Foreign-invested enterprises have various channels to

acquire funds internationally (Jang, 2017), but domestic fi rms are largely restrained by

the underdeveloped domestic fi nancial market as the central government strictly limits

their direct fi nancing from the international capital market.

The asymmetric financing positions for domestic and foreign-owned firms make

natural treatment and control groups when identifying the policy effect of capital

account liberalization (Shen et al., 2021). Before 2015, China required domestic fi rms to

obtain offi cial pre-approval if they planned to issue international bonds, namely bonds

issued outside the Chinese mainland, but had much looser regulations on FIEs’ bond

issuance abroad. Foreign-invested enterprises may also utilize their internal capital

market to bypass capital control (Desai et al., 2006).